Food Crisis? Before You Jump to Conclusions…

It's key to see that the drought isn't hitting all food makers equally

It’s interesting how investors can sometimes take the ball and run with it … a little too far, in fact. Take the current food crisis as an example. While it’s true that food costs are on the rise overall, it’s not true that all food producers are feeling the same squeeze, if they’re feeling a squeeze at all.

That misunderstanding could be an opportunity, of course, for investors who have a grip on the details of the matter.

Click to Enlarge To hear the media tell it, you’d think trips to the grocery store are costing 50% more than usual this summer, all thanks to the soaring price of corn and wheat. Corn prices hit a multi-year high of $8.27 per bushel on Friday, after falling to a multi-month low of $5.51 in late May. Wheat jumped from a two-year low of $6.20 in mid-June to $8.93 per bushel as of Friday, near a multi-year high. The reason? Drought conditions, not just in the U.S., but across much of the globe.

Indeed, crop conditions have gotten so bad that dire forecasts have already become old-hat. The U.N. Food & Agriculture Organization said its food-price index was up 6% last month (which is a lot, by food standards). Currently at 213, the index is within reach of the February 2011 record of 238, if prices continue to rise.

That’s why names like Tyson Foods (NYSE:TSN) and Pilgrim’s Pride (NYSE:PPC) have been under investor attack of late. Though Tyson is almost exclusively a meat producer, since corn is a primary feed for chicken, cattle and hogs, the higher cost of feeding them may or may not be fully passed along to consumers.

Pilgrim’s Pride is pretty much between the same rock and hard place as Tyson, and it wasn’t able to fully pass along its higher input costs in the second quarter. Despite higher pricing (up 8%, on average), unit volume dropped last quarter, and revenue was only 1% higher in Q2.

On the Flipside

Given the above numbers, this rise in food prices bodes poorly for any company in the food industry. Yet, jumping to conclusions about every food company is a mistake. Some food producers are escaping the bulk of painful input costs.

Click to Enlarge How’s that? Sugar prices, for instance, haven’t exploded. At just under 21 cents per pound, sugar is near a one-year low. Coffee is in the midst of a major downtrend too, falling from $3.048 per pound in May of last year to $1.664 per pound as of the end of last week, and still falling. Though cocoa is up since June, it’s still at the low end of its multi-year trading range.

As for the companies that may have been errantly thrown out with the baby’s bathwater, Switzerland’s Nestle (PINK:NSRGY) and Brazil’s Cosan Limited (NYSE:CZZ) are among them.

While rising grain and wheat prices are clearly taking a toll on some bottom lines, coffee, cocoa, sugar and dairy products — key pieces of Nestle’s chocolate business — have remained pretty well contained. In fact, the Swiss company reported that its input costs were only up 0.5% in the first half of the year, a blip in comparison to the 6.6% improvement in revenue.

Cosan is also well-positioned for a myriad of reasons in the shadow of the global food crisis.

Though corn-based ethanol has become stiflingly expensive for U.S. ethanol producers to make, Brazil’s sugar-based ethanol manufacturers like Cosan are loving how sugar prices are near 12-month lows — and still sinking. It makes their ethanol cheaper to produce and easier to sell relative to U.S.-produced ethanol. Throw in the fact that Brazil is seeing more than its fair share of bumper crops this year, and Cosan could become a Cinderella story in 2012.

The Last Word

The point is, just because a bigger trend is popular doesn’t mean it’s applicable across the board. Not all food companies are in trouble right now, even if investors think they all are.

Even when separating the companies that are feeling the pain of rising commodity prices from those that aren’t, however, it’s easy to draw the wrong conclusion. Take Kellogg (NYSE:K). Yes, the cereal maker is subject to the rise in corn prices. Thing is, there’s only about 8 cents’ worth of corn in a 12-ounce box of Corn Flakes, which sells for about $3.50 right now.

If investors want to gripe, they should gripe about rising shipping costs, which is making Corn Flakes more expensive than the rising cost of corn is.

Bottom line? Dig deeper, because the market is pushing some of these food stocks around for a reason that’s not going to materialize.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.